According to analysts at JPMorgan, market leadership is becoming increasingly unhealthy, with a further rise in stock concentration this January compared to last year.
In a note to clients Tuesday, analysts explained that while the weight of the top 50 stocks within the S&P 500 remains roughly unchanged, the largest ten stocks have continued to increase at the expense of the next 40 and the broader index.
Most institutional investors have been adding exposure to the Magnificent 7 (Alphabet, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA)) starting in 1Q23. However, their weights still remain shy of pre-pandemic levels, according to the firm.
"On the other hand, the non-institutional investors were significantly overweight Mag7 at +9.6%, specifically within AAPL (+4.2%), TSLA (+2.4%) and AMZN (+2.3%). Interestingly, Hedge Fund short interest in Mag7 remains elevated, which could drive even more extreme concentration if there is covering," analysts wrote.
"Even though Mag7 represents 29% of index weight within S&P 500, their share of total expected 2024 earnings is at 21%. However, of the expected earnings growth this year, their contribution is far more significant at 34%," they added.
"If stock leadership remains narrow in 2024, active managers may find themselves in a vicious cycle of again having to compete with momentum chasing index funds and being forced to chase an even more concentrated benchmark."